By default this is set to 'pass' witch means that php will not touch the encoding and output it as it is in the source file.
Normaly this function isn't needed as long as you save the .php file in the same encoding as you want it to output as well as retrive all input in the same encoding, but it don't seam to herd as long as it able to figure out what encoding the output is in ín the first place.